Q3 2022 Synchrony Financial Earnings Call

Welcome to the Synchrony financial third quarter 2022 earnings conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference.

Is being recorded I will now turn the call over to your host Katherine Miller Senior Vice President of Investor Relations you may begin.

Thank you and good morning, everyone welcome to our quarterly earnings Conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release detailed financial schedules and presentation are available on our website synchrony financial Dot com. This information can be accessed by going to the investor.

Relations section of the website.

Before we get started I wanted to remind you that our comments today will include forward looking statements. These statements are subject to risks and uncertainty and actual results could differ materially we list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website during.

During the call we will refer to non-GAAP financial measures in discussing the company's performance you can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.

Finally, synchrony financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties.

The only authorized webcasts are located on our website.

On the call. This morning are Brian doubles, synchrony, as President and Chief Executive Officer, and Brian Wenzel Executive Vice President and Chief Financial Officer, I will now turn the call over to Brian doubles. Thanks.

Thanks, Kathryn and good morning, everyone.

Synchrony delivered another strong quarter of financial results highlighted by net earnings of $703 million or $1 47 per diluted share.

Return on average assets of two 8%.

And our return on tangible common equity of 26, 6%.

Synchrony has the ability to deliver consistent growth and resilient returns is a testament to our well diversified portfolio, our balanced approach to product consumer and credit strategies and the strength of our differentiated business model.

As we continue to leverage our advanced digital capabilities expand our reach through new partners and distribution channels and further diversify our product suite.

Synchrony further solidifies itself as the partner of choice for retailers merchants and providers alike to that end, we added or renewed 15 partners in the third quarter and are excited to be partnering again with asset and floor and decor basket has chosen to partner with synchrony again, because they value three of synchrony as core strengths.

Our superior customer experience, our advanced data analytics and ability to leverage these data insights to drive growth.

And the unique marketing opportunities that exist or synchrony home network, and marketplace, which will enable them to reach more customers and drive growth. Meanwhile, floor and decor has selected a partner with synchrony again because of our ability to power a multi product offering for both consumers and commercial customers floor and decor is a high growth retailer and believes that synchrony is best positioned.

<unk> to help them achieve their objectives.

So whether theyre looking for advanced data analytics.

And the powerful network effect of our marketplaces and networks are seamless omnichannel experiences for our diverse suite of financial products and services synchrony.

Synchrony is well positioned to deliver strong targeted outcomes for each of our partners.

We are increasingly anywhere our customers seeking tailored payment and financing solutions bigger small purchases occurring in person are digitally.

We leverage our industry expertise broad distribution channels and dynamic financial ecosystem to connect our partners with customers whenever and however, they want to be met with a broad range of products and services attractive value propositions and seamless experiences to meet their needs in any given moment.

As a result, synchrony continued to reach and serve more customers in the third quarter on a core basis, excluding the impact of recent portfolio sales and prior year periods. We added $5 8 million new accounts and increased core average active accounts by 8% year over year.

Purchase volume grew 6% to $44 6 billion or 16% on a core basis, reflecting both the increase in accounts as well as higher engagement across those accounts was 8% higher spend per account versus last year. This continued strength in purchase volume was broad based across our portfolio and a testament to the breadth and depth.

Of our five sales platforms.

Compelling value propositions, we offer.

Healthy consumer.

At the platform level synchrony achieved double digit growth in our diversified and value health and wellness digital and home and auto platforms and single digit growth in our lifestyle platform.

More specifically home and auto purchase volume was 11% higher driven by strength in home furniture, and auto related spend as well as the impact of inflationary conditions on inventory gasoline in automotive parts.

In diversified value purchase volume increased 20% driven by higher out of partner spend partner penetration growth and strong retailer performance.

Lifestyle purchase volume grew 6%, reflecting an industry specific rebound within luxury and higher out of partner spend more broadly.

The 18% year over year increase in digital purchase volume generally reflected growth across the platform.

We experience greater customer engagement, including higher active accounts and spend per account among our more established programs and continued momentum in our new program launches the 16% increase in health and wellness purchase volume was driven by broad based growth in active accounts and higher spend per active account in our dental and pet categories.

We are particularly excited about the opportunities we see in our health and wellness platform to reach more patients and provide them with greater access to flexible financing.

As healthcare costs continue to rise and the burden of out of pocket expenses intensifies with the growth in high deductible healthcare plans there.

There is a clear and growing need for consumers to have access to the financial solutions that empower them with choice.

And how and when they manage the cost of planned and unplanned medical procedures as well as elective care procedures.

Today's synchrony is health and wellness platform encompasses more than 260000 provider locations 17 health systems, and approximately 75% of the country's dental and veterinary practices through which we are expanding access to patient financing.

We are a leader in patient care financing for the last 35 years.

Yet we know there is still more we can do to expand accessibility to synchrony as patient financing product suite.

We continue to expand our health and wellness partnerships and drive product and experience innovations.

We're also broadening our distribution channels to reach and serve more customers through integrations with practice management software providers like epic and health systems like St Lukes.

More recently, we announced our integration with cycle.

The audiology industry's number one practice management solution.

Through this partnership Synchrony will leverage a Lego credits leadership in the audiology industry and deliver a comprehensive set of financing options.

Including both care credit health care credit card and a leg ROE credits buy now pay later financing solutions to more than 5000 U S based hearing clinics.

Synchrony is deeply passionate about empowering Americans to have greater access to responsible and flexible financing options whenever and however, they need it.

As we continue to add and renew existing leaders in the health and wellness space, including our partnerships with Aspen Heartland Dental sonar, Belo and American Society of plastic surgeons and expand our distribution channels with practice management software like epic and cycle.

Arnie is increasingly the financial ecosystem at the center of patients' daily lives.

Empowering them with choice and best in class value propositions that truly make a difference.

We believe there is no other consumer lender with the industry expertise customer and provider reach our innovative solutions to help close the gap between Americans patient needs and a suite of financial resources to address them.

Turning now to synchrony as dual and co branded cards, where we also continue to demonstrate momentum.

Purchase volume on these products grew 28% versus last year and represented about 39% of our total purchase volume for the quarter.

When tracking average transaction value and frequency trends across the major out of partner spend categories of these products, we continue to see robust consumer demand across both discretionary and non discretionary categories.

As we would expect there have been some modest seasonal chefs among a few of the major categories in favor of more education related spend and less travel and entertainment spend.

Otherwise transaction values in gas and auto related spend has continued to show growth in line with gas price trends in inflation, while grocery spend value is running relatively steady with the last few months.

The more recent pullback in gas prices appears to have contributed to a slight acceleration in broader discretionary and non discretionary spend with categories like clothing home furnishing and repair bill pay and auto related spending experiencing higher transaction value at similar frequency.

Putting this all together the daily and monthly touch points at Synchrony has with our customers across a broad range of purchases tells us that consumer health remains strong and supportive of demand.

Whether they are taking care of everyday essentials like gas groceries, and medical expenses were making more episodic investments like buying a new mattress or replacing a refrigerator.

Our customers are responsibly accessing financing for their needs maximizing the value they seek and managing well overall as they.

Navigate the pressures of inflation and the uncertainty of the markets.

Importantly, synchroneyes customer insights also informed many of the strategies across our business.

We utilize this data to deliver optimized financing solutions and experiences for our customers greater outcomes for our partners and more predictive insights for synchrony as we manage our portfolio to deliver appropriate risk adjusted returns through cycles, our sophisticated underwriting and diverse product suite allow us to respond quickly to changing consumer.

<unk> and market conditions.

Synchrony combines our scale more than $100 million open accounts and billions of transactions with external data.

<unk> utility and telecom information device identification and usage cash flow and income data and also with partner data like frequency and value of historical purchases.

All to Dimensionalize, our customer in their transactions.

This enables us to more effectively engage and service our customers make better credit and fraud decisions and drive prudent profitable growth.

Once our customers began utilizing our credit products synchrony Leverages real time indicators to monitor any shifts in our borrowers financial wellbeing.

From transaction and payment behavior characteristics to credit Bureau alerts, we're closely in tune with our customers and can make both account and portfolio level adjustments quickly.

And of course, Synchroneyes responsive digital capabilities are complemented by our fully scaled highly experienced servicing teams to ensure that our customers have appropriate support when they need it.

In short Synchroneyes dynamic technology platform is what powers, our ability to have a finger on the pulse of each customer and harness that data into actionable insights. So that we can optimize the outcomes for all stakeholders.

We are able to say, yes to more customers more consistently and for the same level of risk even as market conditions change.

This is what ultimately provides invaluable continuity to our partners and customers and resilient risk adjusted returns to our shareholders.

And with that I'll turn the call over to Brian to discuss the third quarter financial performance in greater detail. Thanks.

Thanks, Brian and good morning, everyone.

Pretty strong third quarter results reflected continued strength of the consumer and broad based demand for the wide range of products and services that our ecosystem seamlessly delivers.

Purchase volume of $44 6 billion reflected a 6% increase compared to last year or 16% on a core basis.

Continued strength in consumer spend coupled with some moderation in the payment rate contributed to 8% higher average balances per account versus last year and 13% growth in ending receivables were 14% on a core basis, our dual and co branded cards accounted for 23% of core receivables and increased 29.

<unk> percent in the prior year net interest income increased 7% to $3 9 billion, primarily reflecting a 10% increase in interest and fees due to higher average loan receivables, partially offset by the impacts of the portfolio was sold during the second quarter of 2022.

On a core basis interest and fees increased 18%.

<unk> for the third quarter when normalizing for the prior year impact of portfolios recently sold was 17, 6% approximately 10 basis points lower than last year, while still approximately 200 basis points higher than our historical average.

Net interest margin was 15 five 2% in the third quarter, our year over year increase of seven basis points.

The primary driver of this increase was a 51 basis point improvement in loan yields, which contributed 42 basis points to net interest margin.

Stronger liquidity portfolio yield also contributed 29 basis points.

These improvements in our loan and liquidity portfolio yields were partially offset by the anticipated increase in interest bearing liability costs, which increased 74 basis points to 2.05% in the quarter and reduced net interest margin by 62 basis points.

The mix of interest, earning assets also reduced net interest margin by roughly two basis points.

Our sales were $1 $1 billion in the third quarter and 5% of average receivables.

The $209 million year over year decrease was primarily driven by the impact of the portfolio was sold in the second quarter of 2022 and program performance.

Provision for credit losses was $929 million for the quarter the year over year increase reflected the impact of a growth driven $294 million reserve builds this year compared to a $407 million reserve release in the prior year.

Other income decreased $50 million.

Primarily reflecting the impact of higher loyalty costs.

Other expenses increased 11% to $1 1 billion, reflecting higher employee cost and other expenses.

Total other expense included $27 million of additional marketing growth reinvestment of Q2's $120 million gain on sale proceeds.

Detailed in the appendix of our presentation, we expect that the gain on sale and the reinvestment need in the second third and fourth quarters of this year will be EPS neutral for the full year 2022.

Our efficiency ratio for the third quarter was 36, 5% compared to 38, 7% last year.

Excluding the effects of the gain on sale reinvestment.

<unk> ratio would've been 35, 6% and approximately 310 basis point improvement versus last year.

Putting it altogether security generated net earnings of $703 million or $1 47 per diluted share for the third quarter.

We also generated a return on average assets of two 8% and return on tangible common equity of 26, 6%.

These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model combined with the compelling value of our financial products and services, we offer through our financial ecosystem.

Synchrony has consistently able to meet a broad range of our customers' needs, while maintaining cost and credit discipline, which allows us to sustainably grow while delivering consistent risk adjusted returns.

Next I'll cover our key credit trends on slide eight.

We continue to see signs of gradual normalization across the credit spectrum of our portfolio.

The vast majority of our borrowers continue to perform consistently with or better than 2019 performance. We continue to monitor borrower behavior closely and note that consumers are still slowly working through excess savings levels from peak levels.

The external data we track indicates due to the combination of summer spending and inflationary conditions, the proportion of customers who receive stimulus payments and have since spent the entire amount has increased approximately two percentage points since July now around 40% compared to 38% a few months earlier.

The remaining 60% of customers sort of a portion or all of the stimulus still saved.

When tracking consumer savings balance trends by tiers zero to 2500, 2500 to 5000 and balances greater than 5000. The external data suggests that during the course of the third quarter. The top two tiers of seamless customers experienced balanced reductions of approximately $300, but have begun to rebound.

While the bottoms here roughly $100 and run off.

Meanwhile, labor markets continued to be robust and portfolio payment rates remain elevated compared to our historical five year average.

This suggests to us that borrowers generally remained well positioned to support robust demand for goods and services, while responsibly meeting their financial obligations.

Turning to synchrony portfolio, our 30, plus delinquency rate was 328% compared to $2 four 2% last year, and our 90, plus delinquency rate was 143% compared to one 5% last year.

Third quarter net charge off rate was 3% versus $2, one 8% last year. This 82 basis points year over year increase generally reflected the gradual progression of our credit losses towards our portfolio underwriting target of five 5% to 6%.

Our allowance for credit losses, as a percent of loan receivables was 10, five 8% down seven basis points from the $10 six 5% in the second quarter.

Moving on to another source of synchrony strength, our capital liquidity and funding.

There is positive at the end of the third quarter reached $68 4 billion.

An increase of $8 1 billion compared to last year.

Our securitized and unsecured funding sources increased by one 6 billion.

Altogether it deposits represented 82% of our funding, while securitized and unsecured debt represented 8% and 10% respectively at quarter end.

Total liquidity, including Undrawn credit facilities was $23 billion or 21% of our total assets consistent with last year.

We maintain a diversified approach to both our deposit base and secured and unsecured debt issuances and prioritize a strong and efficient funding foundation of at least 80% deposits.

We expect to continue to grow our deposits to fund our growth and we'll maintain an opportunistic approach to secured and unsecured issuances when market conditions are supportive of efficient funding.

Generally speaking, we manage our balance sheet to be interest rate neutral that said as we continue to grow our deposit base and actively encourage a rotation from savings to Cds were actively extending our deposit duration.

As a result, we expect to be slightly liability sensitive over the near term, while we continue to manage interest rate through term maturities.

It's also important to note that through the mutual alignment of economic interest and delivery of a minimum return on assets at the partner program level, Synchroneyes RSA, who will provide some offsetting support to the impact of rising interest rates on our business.

Moving on to discuss synchrony strong capital position.

No that we previously elected to take the benefit of the seasonal transition rules issued by the joint federal banking agencies.

As a result, starting this past January of 2022 and ending in January 2025, Synchrony makes an annual transitional adjustment of approximately 60 basis points to our regulatory capital metrics. The impact of seasonal has already been recognized in our income statement and balance sheet.

With that in mind, we ended the quarter at 14, 3% CET one under the seasonal transition rules 280 basis points lower than last year's level of 17, 1%.

The tier one capital ratio was 15, 2% under the seasonal transition rules compared to 18% last year.

The total capital ratio decreased 280 basis points to 16, 5%.

And the tier one capital plus reserve ratio on a fully phased in basis decreased to 24, 1% compared to 26, 6% last year.

We continued our track record of robust capital returns in the third quarter. In total we returned $1 1 billion to shareholders through $950 million of share repurchases and $109 million of common stock dividends.

As of quarter end, our total remaining share repurchase authorization for the period ending June 2023 was $1 4 billion.

<unk> remains well positioned to continue to return considerable capital to our shareholders as guided by our business performance market conditions and subject to our capital plan and regulatory restrictions.

Finally, please note that our full year 2022 outlook as outlined on slide 11, which have been updated in the following ways ending loan receivable growth versus last year is now expected to be approximately 12% or more up from 10% plus previously the.

Net charge offs will be approximately three 5% for the full year.

Now from our prior expectation of three 5%.

RSA as a percentage of average loan receivables will be approximately five 1% for the full year down from five 5% previously.

Turning to net interest margin and operating expenses.

Net interest margin will be approximately 15, 5% up from approximately $15 five <unk> percent and incorporates our latest view on the interest rate environment and funding needs.

Operating expenses should continue their quarterly run rate of approximately $1 5 billion, excluding the impact of the gain on sale reinvestment plans, which are detailed in the appendix of earnings presentation.

To conclude <unk> remains very well positioned to achieve our long term financial operating targets as the environment Normalizes I will now turn the call back over to Brian for his closing thoughts.

Thanks, Brian Synchrony.

Synchrony third quarter financial performance highlighted the benefits of our highly diversified business.

Across spend categories product offerings, and distribution channels and through our ever growing network of partners merchants and providers American's financial needs are increasingly powered by the synchrony ecosystem.

Our ability to efficiently and dynamically leverage real time data and deliver optimize financing solutions and experiences for our customers and partners, even as needs evolve and market conditions shift is what enables synchrony to consistently deliver the outcomes that matter most for our many stakeholders Utah.

Utility and value for our customers.

Sales and loyalty for our partners and providers and sustainable growth and consistent risk adjusted returns to our shareholders.

With that I'll turn the call back to Catherine to open the Q&A.

That concludes our prepared remarks, we will now begin the Q&A session. So that we can accommodate as many of you as possible I'd like to ask the participants to please limit yourself to one primary and one follow up question.

If you have additional questions the investor relations team will be available after the call.

Operator, please start the Q&A session.

Thank you we will now begin the question and answer session. If you have a question. Please press <unk> then one on your Touchtone phone.

Wish to be removed from the queue. Please press zero, then too if youre using a speakerphone. Please pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press star zero than one we have our first question from Ryan Nash with Goldman Sachs.

Hey, good morning, guys.

Good morning, Ryan.

So Brian the fourth quarter net charge offs guide implies a little bit of a ramp can you maybe just talk about what is driving that and then second you had said in the past that you would expect to approach more normal levels by the end of 'twenty three call. It five five and obviously that implies a decent ramp from here can you maybe just talk about how you see credit.

Progressing in the intermediate term and what does this mean for the allowance.

Yeah, Thanks, Bryan so.

Again, the guide for that for the quarter better than our expectation to be honest with you as we exited out of the third quarter delinquency and loss forms a little bit better than our expectation and when we look at the attributes inside of the portfolio by credit grade, they're performing still better than 2019, so the credit normalization ramp.

That we see is really on target from what we had projected and really view that we'll get back to that mean loss rate as we exit out of 2023 absent a significant change in the macroeconomic event. When you think about the fourth quarter I mean, when you look at our 90 day plus past due delinquencies at $1 2 billion.

That's going to lead to a rise in charge off dollars, but not unexpected and not anything that we look at it and say that we're concerned about relative to an accelerating credit normalization trends. So we feel good about credit we.

We feel good about the portfolio of distribution that we have and we see migration back to 2019 levels, including in the non prime population. So so again.

We're on target absent a significant change in the macroeconomic event. When you then parlay that into reserves right. When you think about the reserves we have in the books now.

Clearly, we look at the unemployment rate when you have quite a normalization that unemployment rate is projected to be higher right in the core model.

And then we have overlays.

Before I would say a more conservative.

Macro environment. So we believe that the reserve posting as going forward again, it should be more growth driven than anything else, which I think is what you're seeing here in the third quarter.

Got it thanks for the color and then.

The margin is holding up better than expected given the pace of rate hikes, but Brian you did reiterate the balance sheet is somewhat liability sensitive. So can you maybe just talk about.

What is assumed in terms of loan and deposit betas and then if you look out over the remainder of the rising rate cycle, where do you see the margin in betas going into 5% fed funds scenario, just given your balance sheet positioning. Thanks.

Yes. So if you think about the betas that we've experienced to date. So I look at high yield savings roughly around 70% when you think about.

Youre 12 months CD rate when you look at that relative to a swap it's between 75% to 80%.

I would expect Ryan to see that tick up a little bit.

Say high yield savings around 80% and you may see 12 months Cds go to around one.

Again, I think a lot of it's going to depend upon the competition in the market with funding needs people have we need to remain competitive with both our digital partners as well as money market funds with regard to that so.

We continue to be encouraged by the strong franchise, we've been able to grow deposits. After a couple of years of actually shrinking deposits to manage the margins. So we're encouraged with the franchise and what we're building there and I think we've been opportunistic with regard to when we access the wholesale market and how we.

Really operate inside both the CD in high yield savings, we swung to a liability sensitive were a little bit more this quarter not materially more but a little bit more but I think locking in certificate of deposits.

For 12 months to 60 months is going to set us up nicely for.

2023, again, we will be back in January when we see where we exit out of 2022 from a fed funds perspective, and with the fed anticipates a terminal rate will be and we will back to provide some color on how to think about that in next year.

Thanks for the color.

Thank you Frank.

We have our next question from Moshe Orenbuch with credit Suisse.

Great. Thanks, Brian , hoping you could kind of talk about as you think about that credit normalization.

One of the features of your P&L, that's somewhat unique as the <unk>.

RSA and how that reflects and we've had some kind of.

That puts and takes over the last several years and good performance this quarter, but could you talk a little bit about how.

That normalizes, how you would expect at RSA to behave over the course of 2023.

Thanks Moshe.

Again, I think as we've said and I know people have been frustrated with the RSA is acting as the design so when charge offs kind of <unk>.

Raft out the RSA peak now we start to see charge off dollars rising.

Partially offset by higher interest and fees, but really seeing that flow through the RSA, which gave us a sub 5% RSA for for <unk>.

This quarter, most certainly we've incorporated that into the guide into the fourth quarter again, I think we'll be back in January to kind of give you that trajectory. There is nothing that we look at Moshe that says as you move back towards that normalized loss rate of five and a half that we're going to be outside of the traditional RSA range of four to four five.

So from a charge off perspective, it's acting as designed and should go back clearly I think we're going to have to look at how our net interest margin and program performance works, but again, we think generally youre going to see the RSA rate trend down as charge offs trend up.

Only thing I would add there is you also have to remember that that also means that payment rates got to moderate and youll have some top line benefit as well.

Interest and fees.

Perfect. Thanks, and just as a follow up I mean, you did highlight both the percentage of the business and the growth rates kind of at your co brands.

And dual card portfolios maybe.

Could you talk a little bit about whether how the plan over the next several years is the plan to grow that does that does that grow faster. How do you think of FX, that's contributor to synchrony as overall growth rate.

Yes look I'll start and ask Brian to comment I think look we try and grow all of our products.

As disciplined as we can and achieving risk adjusted returns. So I think we've seen really good growth on dual and co branded card. Some of that is new program launches. Some of that is new value props that we've launched and refreshed in the last year or two.

We really like that product, it's a great product to graduate customers into over time. So if we start on a private label card with a with a relatively modest line once we get comfortable.

With their creditworthiness and payment behavior et cetera, and we get to know them and we get a sense for whether or not they are willing to spend outside of the brand. Then we obviously look at them and upgrade them into a dual card. So that's the strategy. We've had for years. It works really well both from a risk.

Our risk standpoint, as well as a return standpoint.

No Brian photo.

Yes, the only thing I would highlight Brian you talked quite a bit about the multi product.

Broach here and having the right product for our customers and when you look at our partner bases, whether it's Paypal Venmo Verizon Walgreens.

And some of the other core retailers T. Jack Sam's that product is fits nicely into the portfolio and we do it at a line structure very different than our competitors. So allows us to control the risk.

In the portfolio and really optimize the.

The balance and frankly some of our best most engaged customers are customers, who earn rewards outside of the brand bring those points back into the brand and our partners really they really value that those are long term very valued customers.

Thanks very much.

Thank you.

We have our next question from Sanjay Zuk, Ronnie with VW.

Actually Vanessa I think Mihir bhatia from Bmo's teed up.

Please proceed from here, Yes, hi, good morning, and thank you for taking my question.

Wanted to ask just about the underwriting standards in general have you tightened I mean, I'm just looking at driving that lower.

New accounts.

This quarter Im just trying to understand what could be driving that.

Yes, So let me go to latter part the lower new accounts is really the portfolio sold during the second quarter. If you look at on a core basis, which strips out those portfolios were up 2% and generated again $5 8 million new accounts from an underwriting standpoint, we have not seen in the portfolio.

Attribute which would require us to take kind of measures across the entire portfolio that said here we are.

These are making refinements and changes to our underwriting standards, we look at channels partners and performance. So so again, we don't see attributes where we need to take a broad based action.

But we arent.

It's really taking.

<unk>.

Taking some small refinements I also want to go back to what's really unique about our underwriting and what we've done over the last.

Several years as we have not relied upon credit to be the primary driver of growth. So we haven't changed our underwriting standards, we haven't gone out like a lot of other issuers to use that and credit lines in order to get new accounts, we have people coming to us because they are the most loyal customers, where our partners and really want to engage with value propositions in the brand.

And because we get so much data from our partners because we are using unique attributes, which we highlighted in prism and our Investor Day, and then you combine that.

You combine those attributes enrolling together, we think we're making actually hopefully smarter decisions on risk at the end of the day and not having to take more risk and again, we see nothing that.

<unk> says, we need to tighten across the board, but again, we have the abilities and the tools to manage that risk.

If we see a change in the portfolio.

We try to we try to minimize the ups and downs for our partners as well so to Brian's point win when times are really good we don't dig a lot deeper and take advantage of that and then put ourselves in a position where we have to pull way back coming out of that I think that consistency and that discipline is important not just for our own risk and returns, but obviously.

For our partners too so they're not feeling the ups and downs. So we try to stay as consistent.

Paul today.

One final point on that would be here, just adding onto Bryan's point. If you go back we've provided a chart before if you look at the volatility in credit through cycles.

Generally less volatile because of the way in which our line structure and this underwriting standards and in most early you can go back we showed the chart a number of different times and it's because of the severity.

And the consistency kind of gives us a competitive advantage.

Got it.

And then maybe just.

Kind of following along with what you said, Brian about being.

For our partners.

How does that conversation started changing now and.

Particularly at what I guess, what im asking is around competitive intensity for new sign.

Sign ups and are there particular opportunities, maybe even with existing partners to grow products just given the pullback in some of the valuations and particularly on the Fintech side are you seeing some softness coming back to you, saying Hey, maybe you can add this product just like just trying to understand how those conversations are going and if there's any opportunities.

And just the competitive environment right now for five months.

Yeah sure. So look I would start by saying, it's still a pretty competitive environment out there I think.

Given what has happened.

Some of the Fintech space, you've seen a little bit of a pull back there may be a little bit less aggressive in terms of offers and rates et cetera.

But what I will tell you is that as we're out talking to our partners and prospects.

What's really resonating right now is the multi product strategy being able to offer buy now pay later paying for migrating to other products in our portfolio because I think one of the things that.

Our partners have seen.

Is that depending on the consumer depending on the product that's being purchased and frankly, depending on the macro economic environment are paying for it gets a lot more expensive.

In an environment, where rates are rising at the pace that they are rising and so I think partners have taken a step back and now they're trying to rationalize their point of sale and saying Hey look how do I, how do I optimize us.

For the economy.

Operating in for my consumer for what Theyre buying.

And what's great is we can go in and say look for this product. We think it's a 12 month six month <unk>.

Social financing product with an opportunity to upgrade them into a revolving product down the road.

That's pretty powerful that's pretty powerful because it gives them optionality and it helps them manage the expense side of the equation too in terms of what those financing offers cost down from what it takes out of their margins. So we're seeing really good traction in terms of the discussions that we're having out there both with our existing partners as well as new prospects.

Okay. Thank you.

Yeah. Thanks Pierre.

Thank you. Our next question is from Sanjay <unk> with K B W.

Thanks, Good morning.

I guess first question for Brian Wenzel on your comments related to Dean liability unchanged understandably it might have some headwinds on the NIM, but I'm just trying to think about NII.

Your yield is obviously benefiting from rates, but also higher revolve could you just help us parse through that and you think about it going forward.

Sure. Good morning, Sanjay So when you think about NIM, if I think about it sequentially for the quarter.

We picked up about 30 basis points of prime benefit.

And the yields we also picked up about four benefits really to merchant discounts. So when you look at.

The prime impact of 30 merchant discount of four.

Some of the investment portfolios on the cash position picking up 16, we largely offset.

The interest expense increase so generally neutral the important part, though Sanjay is when I look at the prime rate benefit the effect of prime for the quarter was $4 75, we we tend to be a little bit slower the way our cards bill out in <unk>. So we have some more room to increase that.

As we move into the fourth quarter. When you think about the merchant discount pricing, we're about 60% to 70% of that price through.

To our partners and that's something that we tried to be measured on and deal with competition. So we think that from a margin perspective, most certainly I think in the guide in the fourth quarter, we should get those those tailwind is kind of coming through again some of the portfolio will be resetting as you get a full quarter price for some of the some of the Cds.

Things like that that we put on in the.

In the third quarter as well as the increase in the high yield savings, but we feel good about it.

I think locking up at these rates. If you believe that the interest rate cycle is going to continue to move up here in the latter part of the fourth quarter into next year.

Having those certificate of deposits and being a little bit liability sensitive right now.

Should benefit US next year as we move forward again, we'll be back in January with probably some more comprehensive thoughts on a sanjay, but that's kind of how to think about it. So so we got a small lift when I go back to.

The revolve rate.

In late fees going up with delinquencies, partially offset by reversals, but but again the prime rate is flowing through.

Got it.

And then maybe question for Brian doubles, just following up on what me here.

Asking earlier I mean, I kind of asked this question last quarter, but.

You have another quarter of a dislocation amongst fintech valuations you've had the CFPB, obviously come in with some comments on regulatory actions potentially for buy now pay later I'm just curious.

That's presenting an opportunity for you guys do you feel like there might be some offensive moves you can make I mean, just broadly speaking maybe you could just address that a little bit more.

Yes, sure Sanjay look I think we're absolutely playing offense I do think there's been a little bit of a checkup in the market now partners are thinking about these products.

And how they want to design their point of sale for the future and this is where again, we think the multi product strategy wins over the long term.

And I'll comment quickly on just the regulatory environment. We think also favors us I mean, we are heavily regulated today as you know.

And we would certainly advocate for a level playing field that doesn't exist today, so I think to the extent that some of these.

<unk> around the periphery become more regulated and more scrutinized and I think thats a net positive for us.

And so I think there's a few things that.

Play to our advantage.

For the first time in a few years with valuations where they are maybe that presents some.

Some attractive M&A opportunities if there is something on the technology side.

It would be faster to buy than to build so that's something that we're always looking at we've got a very active M&A screen.

I think we're also very disciplined and very focused on valuations.

And that was one of the things that we didn't see over the last couple of years was attractive entry points.

But.

That's something that we run a very active process on and we'll continue to look at but very disciplined around valuation.

Sure.

Impact to EPS.

Thank you.

Thanks Sanjay.

Our next question is from John .

Very much change right there being very consistent they are making choices.

Where where people are saying, okay, maybe I was spending a little bit more for groceries gasoline spending a little bit less on <unk>, but we're seeing very much consistency as we think about average transaction values and frequency consistently throughout the year and we look at it by credit grade by platform, we look at the World composition.

Ponant, so everything seems to be consistent so the customer itself is not migrating or changing their spending behavior patterns. We continue to see just tremendous.

Positive growth relative to our millennial and Gen Z as they make up about 25% of our sales there are fastest growing cohort.

Call It four to 500 basis points higher than the company average so they continue to to view that again the value propositions have to resonate with the customers and we continue to think that in the multi product and distribution model that we have we just thinks attractive. So we have not seen the consumer from a spending behavior pattern change significantly again.

Making smarter decisions, but overall level of spend not really changing I think.

We're starting to see on the merchant side I think Brian cover the consumer really well on the merchant side. I think you will see we have started to see and we'll continue to see some adjustment in terms of what financing offers are are presented to the customer because they are trying to manage in a higher interest rate environment and there are costs I mentioned that particularly if you get to some of the really short.

Our data and stuff is.

That gets pretty expensive this year zero percent of the consumer and the merchants paying for all of that so we have seen some.

Some partners.

Working to rationalize the.

The product offerings inside of there inside of their businesses.

Okay. That's very helpful and then.

Second unrelated question is just thinking about the RSA next year as Bryan maybe you can remind us.

The correlation for the as.

As credit normalizes correlation for the IRS stated delinquencies provisions or charge offs is there any seasonality or timing differences for us to think about there.

Yes, John we will be back in January 2023, as a whole, but I think if you think about the RSA charge offs move immediately through the RSA line right. So so youre going to see that impact as that normalizes into.

2023 that will provide a benefit to the RSA. The other two components I think to think about is reserve postings growth or otherwise flow through the RSA and a little bit of a lag.

So that will that will impact it but again, Brian Brian consistently pointed out rightfully so that as credit normalizes, we would expect to see.

Your revenue increase in the yield increase on the portfolio. So so again.

If we don't see the payment rate change youre not going to have that normalization. They have to they have to work in concert. So again I think those are the general gives and takes I think the other thing will be how.

Our cost of funds really moves and that flows through as a benefit to the RSA in a rising rate environment.

Okay. Thank you guys very much.

Thanks, John and good day, Thanks, Sean.

Our next question comes from Kevin Barker with Piper Sandler.

Thank you.

Growth has been extremely strong not only for you guys, but also across the industry as payment rates have slowed and savings rates have come down.

Yes.

Given what you see out there from a macro perspective.

And these declining savings ratio would you expect this growth to slow considerably as we move through the next few quarters.

And probably get more down to a more normal rate maybe in the mid single digits as we get through near the end of 2023.

It just seems like these growth rates are obviously arent.

Yes.

Able to be sustained for an extended period of time. Thanks.

Yes.

The way I think about it Kevin is is you have this period of time, where the consumer is working through.

Number one excess liquidity that they have so that savings rate and that will carry you through particularly on some of the higher spenders.

Well into 2023.

In some of the lower credit quality cohorts in hourly bill Youre seeing wage gains that are offsetting inflation. So you would have some tailwind with regard to spend it.

See that strong spending behavior pattern, what we probably anticipate is some of that savings drivers up and some of them maybe the lack of.

Or the utilization of lower discretionary spending because people aren't going to the office every day as that tightened a little bit what youre going to see is probably spending come down and payment rate come down, but I think what you're going to see first as payment rate begin to slow spending say there youre going to see balances go up and then youre going to see purchase.

Slow so I think the there could be elongation of asset growth year.

In the short term.

Again, we'll have to see how the economy. The macroeconomic scenario plays out for our medium term, but clearly they are probably more tailwind and headwinds in the short term.

Okay, and then you addressed it earlier on some.

Addressed underwriting standards and no changes there trying to maintain consistency.

Yes.

<unk> targeted.

$2 4 billion I believe buyback program.

What type of macro conditions or underlying spending trends.

Would you have to see play out before you would start to reconsider whether it's underwriting standards or continuing.

Buy back stock at the level that you are buying it back.

Well I'll start and ask Brian to comment look I think we are running the business very nimbly right now we're ingesting thousands of data points every day on what the consumer is doing payment trends and behaviors. We look at it by program by product by geography.

We're looking for.

Any indicators that say, we need to make some tweaks as we go and I call on tweaks because this.

For Us this is not an event, it's not one day your risk on and they are de risk off. It's you kind of take what you are seeing everyday and you kind of make changes and slight modifications as you go and.

And we feel really good about our ability to do that we've invested a lot in our technology platform. Our data sources are tools.

And so there isn't one thing that we look at but as we're looking at percent of customers that make the min payment how much above the men payment or are they making.

Who's got late for the first time those are all little tells and little signs that say, okay. Maybe we go in and we just we turned the dial a little bit.

And so again, we feel really good about our ability to do that we're not seeing anything right now that is concerning its been a very gradual I'd call. It normalization.

As as we move through the year in fact, I think every quarter, we updated our credit guidance that it was it was always modestly better than what we thought 90 days prior so.

We are still in a pretty good operating environment. We don't see anything that says we got to go in and really Ratchet downgrading and certainly nothing that says we got to.

Do anything different than what we're doing on the share repurchase side.

Brian covered credit let me just talk a little bit about capital I think when we look at our business model, we have tremendous I think resiliency in the margin in our capital generation capacity. So I think as we look out.

We look at what's our ability to generate cash.

Capital, we look at the growth in the <unk> as we look at preserving the dividend.

And then we run our stress test and again as we continue to run those quarterly we don't see anything even in some of the most severe scenarios that would would have us alter or slow down the repurchase activities and capital plans, we have in place, but we do that every quarter, we'll continue to do it and as long as we can continue to generate.

<unk> strong returns, we feel good about our capital position and moving towards our target, but but ultimately we're going to have to fully develop the capital stack to achieve the target and thats a little bit relying upon the capital markets, but we feel good there and again I think when you put the story together, we really do feel good about.

The margin of the business when you think about the yield and the losses and then capital generation capacity.

Okay.

Yes.

Thanks, Kevin.

The next question is from Rick Shane with J P. Morgan.

Good morning, guys. Thanks for taking my question.

I wanted to talk a little bit about the allowance coverage.

Given where we are both in terms of growth.

You guys are are indicating that credit will continue to normalize we saw an uptick in delinquencies economic outlook is changing.

Why.

Do we see the allowance coverage drift down a little bit in <unk>.

Should we expect that to start heading higher as we move into 2023.

Yeah. Thanks, Rick So so when you look at you look at how we have built our reserve models right. So you look at our baseline macroeconomic forecasts, which again, we take for Moody's as a starting point.

And which shows a call it an unemployment rate next year of 4%.

When we think about credit normalization, right and getting back to that five 5% as we look at the underwriting cohorts. We put our last couple of years that migration back to five 5% the implied unemployment rate and the model is higher than that so think about something thats, probably closer to the mid fours effectively.

Don't necessarily put that in but effectively it shows a higher unemployment rate.

We then on an overlay basis. Okay. If there is some concern what does that scenario.

Oh look like so effectively it gives us a higher reserve coverage as we sit here today than than what you would normally.

Expect given the delinquency profile if you just looked at it by its own. So so unless there is a significant deterioration beyond that and we don't see that then you're really going to be in growth driven reserves. If we just looked at delinquencies today and ran our quantitative models. It will be below day, one seasonal right. So we think we're adequately reserved today.

To encompass what we think's going to happen in 2023 and move it out so we feel good about it I think when you look at the delinquencies that we have in here for three Q. It gives you a pretty good line of sight into what to expect both fourth quarter and most likely first quarter. So you can plan that out and again absent something significant change in the macro.

We feel pretty good about where the coverage is and that we are adequately reserved for under under various scenarios.

Yes, it's interesting I think we're all struggling with the same thing which is that we have a concern going forward, but empirically when we look at the data today, it's hard to.

Sort of connect the dots in.

In terms of that deterioration so we run into the same issues.

Yes.

You have to look at it if I just ran the pure quantitative model I'll just go back to this point again, you'll be below day once diesel and it's really the qualitative models and those overlays that is pushing you higher than day, one and in theory, allowing so if you looked inside our quarter. Our quantitative models moved up in our qualitative has moved down.

The following year. So it's that shift again, a lot of this is going to depend upon what money market funds do and what other institutions do we clearly see.

But we are going to remain competitive the positive news for US we also see money flowing out of.

That typically doesn't end well, so we try and stay very consistent disciplined there what we do work with our partners on is more around the value proposition and the experience for the customer.

As well as being able to offer multiple products and I think that's really where we're focused we're having really good really.

Good discussions with our partners around how we're going to support them for hopefully a strong holiday.

And that is.

<unk> Val prop it's experience is offering new products.

That are tailored for their customer I think it's really that entire kind of ecosystem that.

That we work on with our partners to drive sales for them. That's a proven model I think we've only enhanced it with the investments we've made over the last couple of years and we're pretty optimistic that we're going to support them and hopefully a strong holiday and into a home.

Hopefully strong 2023 thank.

Thank you.

Thanks, Brian .

Good day.

Yeah.

We have no further questions.

That now concludes today's call. Thank you all for joining.

And thank you ladies and gentlemen, this concludes our earnings call. We thank you for your participation you may now disconnect.

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Welcome to the Synchrony financial third quarter 2022 earnings conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to your host Katherine Miller Senior Vice President of Investor Relations you may begin.

Thank you and good morning, everyone welcome to our quarterly earnings Conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release detailed financial schedules and presentation are available on our website synchrony financial Dot com. This information can be accessed by going to the inverse.

Relations section of the website.

Before we get started I wanted to remind you that our comments today will include forward looking statements. These statements are subject to risks and uncertainty and actual results could differ materially we list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call we will refer to non-GAAP financial measures.

Discussing the company's performance you can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.

Finally, synchrony financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties.

The only authorized webcasts are located on our website.

On the call. This morning are Brian doubles, synchrony, as President and Chief Executive Officer, and Brian Wenzel Executive Vice President and Chief Financial Officer, I will now turn the call over to Brian doubles. Thanks.

Thanks, Kathryn and good morning, everyone Synchrony delivered another strong quarter of financial results highlighted by net earnings of $703 million or $1 47 per diluted share.

Return on average assets of two 8% and.

And our return on tangible common equity of 26, 6%.

Synchrony has the ability to deliver consistent growth and resilient returns is a testament to our well diversified portfolio, our balanced approach to product consumer and credit strategies and the strength of our differentiated business model.

As we continue to leverage our advanced digital capabilities expand our reach through new partners and distribution channels and further diversify our product suite.

Synchrony further solidifies itself as the partner of choice for retailers merchants and providers alike.

To that end, we added a renewed 15 partners in the third quarter and are excited to be partnering again with asset and floor and decor facet has chosen to partner with synchrony again, because they value three of synchrony as core strengths.

Our superior customer experience, our advanced data analytics and ability to leverage these data insights to drive growth.

And the unique marketing opportunities that exist for synchrony as home network and marketplace, which will enable them to reach more customers and drive growth. Meanwhile, floor and decor has selected to partner with synchrony again, because of our ability to power a multi product offering for both consumers and commercial customers.

Lauren decor is a high growth retailer and believes that synchrony is best positioned to help them achieve their objectives.

Whether theyre looking for advanced data analytics, and the powerful network effect of our marketplaces and networks are.

Our seamless omnichannel experiences for our diverse suite of financial products and services.

Synchrony is well positioned to deliver strong targeted outcomes for each of our partners.

We are increasingly anywhere our customer seeks tailored payment and financing solutions digger small purchases occurring in person are digitally.

We leverage our industry expertise broad distribution channels and dynamic financial ecosystem to connect our partners with customers whenever and however, they want to be met with a broad range of products and services attractive value propositions and seamless experiences that meet their needs in any given moment.

As a result, synchrony continuing to reach and serve more customers in the third quarter on a core basis, excluding the impact of recent portfolio sales on prior year periods. We added $5 8 million new accounts and increased core average active accounts by 8% year over year.

Purchase volume grew 6% to $44 6 billion or 16% on a core basis, reflecting both the increase in accounts as well as higher engagement across those accounts with 8% higher spend per account versus last year. This continued strength in purchase volume was broad based across our portfolio and a testament to the breadth and depth.

Of our five sales platforms.

Compelling value propositions, we offer.

Healthy consumer.

At the platform level synchrony achieved double digit growth in our diversified and value health and wellness digital and home and auto platforms and single digit growth in our lifestyle platform.

More specifically home and auto purchase volume was 11% higher driven by strength in home furniture, and auto related spend as well as the impact of inflationary conditions on inventory gasoline in automotive parts.

And diversifying value purchase volume increased 20% driven by higher out of partner spend partner penetration growth and strong retailer performance.

Lifestyle purchase volume grew 6%, reflecting an industry specific rebound within luxury and higher out of partner spend more broadly.

The 18% year over year increase in digital purchase volume generally reflected growth across the platform, we experience greater customer engagement, including higher active accounts and spend per account among our more established programs and continued momentum in our new program launches the 16% increase in health and wellness purchase volume was driven by broad based growth and.

Active accounts and higher spend per active account in our dental and pet categories.

We are particularly excited about the opportunities we see in our health and wellness platform to reach more patients and provide them with greater access to flexible financing.

As health care cost continue to rise and the burden of out of pocket expenses intensifies with the growth in high deductible healthcare plans.

There is a clear and growing need for consumers to have access to the financial solutions that empower them with choice.

And how and when they manage the cost of planned and unplanned medical procedures as well as elective care procedures.

Today's synchrony is health and wellness platform encompasses more than 260000 provider locations 17 health systems, and approximately 75% of the country's dental and veterinary practices through which we are expanding access to patient financing.

We are a leader in patient care financing for the last 35 years.

Yes, we know there is still more we can do to expand accessibility to synchrony as patient financing product suite.

We continue to expand our health and wellness partnerships and drive product and experience innovations.

We're also broadening our distribution channels to reach and serve more customers through integrations with practice management software providers like epic and health systems like St Lukes.

More recently, we announced our integration with cycle.

The audiology industry's number one practice management solution.

Through this partnership Synchrony will leverage a Lego credits leadership in the audiology industry and deliver a comprehensive set of financing options.

Including both care credit health care credit card and Allegro credits buy now pay later financing solutions to more than 5000 U S based hearing clinics.

Synchrony is deeply passionate about empowering Americans to have greater access to responsible and flexible financing options whenever and however, they need it.

As we continue to add and renew existing leaders in the health and wellness space, including our partnerships with Aspen Heartland Dental Sono Bello and American Society of plastic surgeons and expand our distribution channels with practice management software like epic and cycle.

Tony is increasingly the financial ecosystem at the center of patients' daily lives.

Empowering them with choice and best in class value propositions that truly make a difference.

We believe there is no other consumer lender with the industry expertise customer and provider reach our innovative solutions to help close the gap between Americans patient needs and a suite of financial resources to address them.

Turning now to synchrony to dual and co branded cards, where we also continue to demonstrate momentum.

Purchase volume on these products grew 28% versus last year and represented about 39% of our total purchase volume for the quarter.

When tracking average transaction value and frequency trends across the major out of partner spend categories of these products, we continue to see robust consumer demand across both discretionary and non discretionary categories.

As we would expect there have been some modest seasonal chefs among a few of the major categories in favor of more education related spend and less travel and entertainment spend otherwise transaction values in gas and auto related spend have continued to show growth in line with gas price trends in inflation, while grocery spend value is running relatively steady with the law.

Few months.

The more recent pullback in gas prices appears to have contributed to a slight acceleration in broader discretionary and non discretionary spend with categories like clothing home furnishing and repair bill pay and auto related spending experiencing higher transaction value at similar frequency.

Putting this altogether the daily and monthly touch points with synchrony has with our customers across a broad range of purchases tells us that consumer health remains strong and supportive of demand.

Whether they are taking care of everyday essentials like gas groceries, and medical expenses are making more episodic investments like buying a new mattress or replacing a refrigerator.

Our customers are responsibly accessing financing for their needs maximizing the value they seek and managing well overall.

Navigate the pressures of inflation and the uncertainty of the markets.

Importantly, synchroneyes customer insights also inform many of the strategies across our business.

We utilize this data to deliver optimized financing solutions and experiences for our customers greater outcomes for our partners and more predictive insights for synchrony as we manage our portfolio to deliver appropriate risk adjusted returns through cycles, our sophisticated underwriting and diverse product suite allow us to respond quickly to changing consumer.

<unk> and market conditions.

Synchrony combines our scale more than $100 million open accounts and billions of transactions with external data.

<unk> utility and telecom information device identification and usage cash flow and income data and also with partner data like frequency and value of historical purchases.

All to Dimensionalize, our customer in their transactions.

This enables us to more effectively engage and service our customers make better credit and fraud decisions and drive prudent profitable growth.

Once our customers began utilizing our credit products synchrony Leverages real time indicators to monitor any shifts in our borrowers financial wellbeing.

From transaction and payment behavior characteristics to credit Bureau alerts, we're closely in tune with our customers and can make both account and portfolio level adjustments quickly.

And of course synchrony as responsive digital capabilities are complemented by our fully scaled highly experienced servicing teams to ensure that our customers have appropriate support when they need it.

In short Synchroneyes dynamic technology platform is what powers, our ability to have a finger on the pulse of each customer and harness that data into actionable insights. So that we can optimize the outcomes for all stakeholders.

We are able to say, yes to more customers more consistently and for the same level of risk even as market conditions change.

This is what ultimately provides invaluable continuity to our partners and customers and resilient risk adjusted returns to our shareholders.

And with that I'll turn the call over to Brian to discuss our third quarter financial performance in greater detail. Thanks.

Thanks, Brian and good morning, everyone.

Synchrony has strong third quarter results reflected continued strength in consumer and broad based demand for the wide range of products and services that our ecosystem seamlessly delivers.

Volume of $44 6 billion reflected a 6% increase compared to last year or 16% on a core basis.

Continued strength in consumer spend coupled with some moderation in the payment rate contributed to 8% higher average balances per account versus last year, and 13% growth in ending receivables or 14% on a core basis, our dual and co branded cards accounted for 23% of core receivables and increased 20.

9% from the prior year net interest income increased 7% to $3 9 billion, primarily reflecting a 10% increase in interest and fees due to higher average loan receivables, partially offset by the impacts of the portfolio sold during the second quarter of 2022.

On a core basis interest and fees increased 18%.

<unk> for the third quarter when normalizing for the prior year impact of portfolios recently sold was 17, 6% approximately 10 basis points lower than last year, while still approximately 200 basis points higher than our historical average.

Net interest margin was 15 five 2% in the third quarter, our year over year increase of seven basis points.

The primary driver of this increase was a 51 basis point improvement in loan yields, which contributed 42 basis points to net interest margin.

Stronger liquidity portfolio yield also contributed 29 basis points.

These improvements in our loan and liquidity portfolio yields were partially offset by the anticipated increase in interest bearing liability costs, which increased 74 basis points to 2.05% in the quarter and reduced net interest margin by 62 basis points.

The mix of interest, earning assets also reduced net interest margin by roughly two basis points.

<unk> were $1 $1 billion in the third quarter and 5% of average receivables.

The $209 million year over year decrease was primarily driven by the impact of the portfolio was sold in the second quarter of 2022 and program performance.

Provision for credit losses was $929 million for the quarter the year over year increase reflected the impact of a growth driven $294 million reserve builds this year compared to a $407 million reserve release in the prior year.

Other income decreased $50 million.

Primarily reflecting the impact of higher loyalty costs.

Other expenses increased 11% to $1 1 billion, reflecting higher employee cost and other expenses.

Total other expense included $27 million of additional marketing growth reinvestment of Q2's $120 million gain on sale proceeds as detailed in the appendix of our presentation, we expect that the gain on sale and the reinvestment need in the second third and fourth quarters of this year will be EPS neutral for the full year 2022.

Our efficiency ratio for the third quarter was 36, 5% compared to 38, 7% last year.

Including the effects of the gain on sale reinvestment the efficiency ratio would've been 35, 6% and approximately 310 basis point improvement versus last year.

Putting it altogether synchrony generated net earnings of $703 million or $1 47 per diluted share for the third quarter.

We also generated a return on average assets of two 8% and return on tangible common equity of 26, 6%.

These strong net earnings and returns demonstrate the power and efficiency of our digitally enabled model combined with the compelling value of our financial products and services, we offer through our financial ecosystem.

Synchrony has consistently able to meet a broad range of our customers' needs, while maintaining cost and credit discipline, which allows us to sustainably grow while delivering consistent risk adjusted returns.

Next I'll cover our key credit trends on slide eight.

We continue to see signs of gradual normalization across the credit spectrum of our portfolio.

The vast majority of our borrowers continue to perform consistently with or better than 2019 performance. We continue to monitor borrower behavior closely and note that consumers are still slowly working through excess savings levels from peak levels.

The external data we track indicates due to the combination of summer spending and inflationary conditions, the proportion of customers who receive stimulus payments and have since spent the entire amount has increased approximately two percentage points since July now around 40% compared to 38% a few months earlier.

The remaining 60% of customers sort of a portion or all of the stimulus still saved.

When tracking consumer savings balance trends by tiers zero to 2500, 2500 to 5000 and balances greater than 5000. The external data suggests that during the course of the third quarter. The top two tiers of seamless customers experienced balanced reductions of approximately $300, but have begun to rebound.

While the bottoms here roughly $100 in run off.

Meanwhile, labor markets continued to be robust and portfolio payment rates remained elevated compared to our historical five year average.

This suggests to us that borrowers generally remained well positioned to support robust demand for goods and services, while responsibly meeting their financial obligations.

Turning to synchrony portfolio, our 30, plus delinquency rate was 328% compared to 242% last year, and our 90, plus delinquency rate was 143% compared to one 5% last year.

Third quarter net charge off rate was 3% versus 218% last year. This 82 basis points year over year increase generally reflected the gradual progression of our credit losses towards our portfolio underwriting target of five 5% to 6%.

Our allowance for credit losses, as a percent of loan receivables was 10, five 8% down seven basis points from the $10 six 5% in the second quarter.

Moving onto another source of synchrony strength, our capital liquidity and funding.

Deposits at the end of the third quarter reached $68 4 billion.

An increase of $8 1 billion compared to last year.

Securitize and unsecured funding sources increased by $1 6 billion.

Altogether deposits represented 82% of our funding, while securitized and unsecured debt represented 8% and 10% respectively at quarter end.

Total liquidity, including Undrawn credit facilities was $23 billion or 21% of our total assets consistent with last year.

We maintain a diversified approach to both our deposit base and secured and unsecured debt issuances and prioritize a strong and efficient funding foundation of at least 80% deposits.

We expect to continue to grow our deposits to fund our growth and we'll maintain an opportunistic approach to secured and unsecured issuances when market conditions are supportive of efficient funding.

Generally speaking, we manage our balance sheet to be interest rate neutral that said as we continue to grow our deposit base and actively encourage a rotation from savings to Cds were actively extending our deposit duration.

As a result, we expect to be slightly liability sensitive over the near term, while we continue to manage interest rate through term maturities.

It's also important to note that through the mutual alignment of economic interest and delivery of a minimum return on assets at the partner program level, Synchroneyes RSA, who will provide some offsetting support to the impact of rising interest rates on our business.

Moving on to discuss synchrony strong capital position.

No that we previously elected to take the benefit of the seasonal transition rules issued by the joint federal banking agencies.

As a result, starting this past January of 2022 and ending in January 2025, Synchrony, who makes an annual transitional adjustment of approximately 60 basis points to our regulatory capital metrics. The impact of seasonal has already been recognized in our income statement and balance sheet.

With that in mind, we ended the quarter at 14, 3% CET one under the seasonal transition rules 280 basis points lower than last year's level of 17, 1%.

The tier one capital ratio was 15, 2% under the seasonal transition rules.

<unk> to 18% last year.

The total capital ratio decreased 280 basis points to 16, 5%.

And the tier one capital plus reserve ratio on a fully phased in basis decreased to 24, 1% compared to 26, 6% last year.

We continued our track record of robust capital returns in the third quarter. In total we returned $1 1 billion to shareholders through $950 million of share repurchases and $109 million of common stock dividends.

As of quarter end, our total remaining share repurchase authorization for the period ending June 2023 was $1 4 billion.

<unk> remains well positioned to continue to return considerable capital to our shareholders as guided by our business performance marketing conditions and subject to our capital plan and regulatory restrictions.

Finally, please note that our full year 2022 outlook as outlined on slide 11, which has been updated in the following ways ending loan receivable growth versus last year is now expected to be approximately 12% or more up from 10% plus previously the.

Net charge offs will be approximately three 5% for the full year.

Now from our prior expectation of three 5%.

RSA as a percentage of average loan receivables will be approximately $5, 100% for the full year down from five 5% previously.

Turning to net interest margin and operating expenses.

Net interest margin will be approximately 15, 5% up from approximately $15 five <unk> percent and incorporates our latest view on the interest rate environment and funding needs.

Operating expenses should continue their quarterly run rate of approximately one 5 billion, excluding the impact of the gain on sale reinvestment plans, which are detailed in the appendix of our earnings presentation.

<unk> <unk> remains very well positioned to achieve our long term financial operating targets as the environment Normalizes I will now turn the call back over to Brian for his closing thoughts. Thanks.

Thanks, Brian Synchrony third quarter financial performance highlighted the benefits of our highly diversified business.

Across spend categories product offerings, and distribution channels and through our ever growing network of partners merchants and providers American's financial needs are increasingly powered by the synchrony ecosystem, our ability to efficiently and dynamically leverage real time data and deliver optimize financing solutions and experiences for our customer.

<unk> partners, even as needs evolve and market conditions shift is what enables synchrony to consistently deliver the outcomes that matter most for our many stakeholders.

Utility and value for our customers.

Sales and loyalty for our partners and providers and sustainable growth and consistent risk adjusted returns to our shareholders.

With that I'll turn the call back to Catherine to open the Q&A.

That concludes our prepared remarks, we will now begin the Q&A session. So that we can accommodate as many of you as possible I'd like to ask the participants to please limit yourself to one primary and one follow up question.

If you have additional questions the investor relations team will be available after the call.

Operator, please start the Q&A session.

Thank you we will now begin the question and answer session. If you have a question. Please press zero then one on your Touchtone phone.

Wish to be removed from the queue. Please press zero, then too if youre using a speakerphone. Please pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press star zero than one we have our first question from Ryan Nash with Goldman Sachs.

Hey, good morning, guys.

Good morning, Ryan.

So Brian the fourth quarter net charge offs guide implies a little bit of a ramp can you maybe just talk about what is driving that and then second you had said in the past that you would expect to approach more normal levels by the end of 'twenty three call. It five five and obviously that implies a decent ramp from here can you maybe just talk about how you see credit.

Progressing in the intermediate term and what does this mean for the allowance.

Yeah, Thanks, Bryan so.

Again, the guide for that for the quarter better than our expectation to be honest with you as we exited out of the third quarter delinquency and loss forms a little bit better than our expectation and when we look at the attributes inside of the portfolio by credit grade, they're performing still better than 2019, so the credit normalization ramp.

That we see is really on target from what we had projected and really view that we'll get back to that mean loss rate as we exit out of 2023 absent a significant change in the macroeconomic event. When you think about the fourth quarter I mean, when you look at our 90 day plus past due delinquencies at $1 2 billion.

That's going to lead to a rise in charge off dollars, but not unexpected and not anything that we look at it and say that we're concerned about relative to an accelerating credit normalization trends. So we feel good about credit we.

We feel good about the portfolio of distribution that we have and we see migration back to 2019 levels, including in the non prime population. So so again.

We're on target absent a significant change in the macroeconomic event. When you then parlay that into reserves right. When you think about the reserves we have in the books now.

Clearly, we look at the unemployment rate when you have quite a normalization that unemployment rate is projected to be higher right in the core model.

And then we have overlays for I would say a more conservative.

Macro environment. So we believe that the reserve post use going forward again, it should be more growth driven than anything else, which I think is what you're seeing here in the third quarter.

Got it thanks for the color and then.

The margin is holding up better than expected given the pace of rate hikes, but Brian you did reiterate the balance sheet is somewhat liability sensitive. So can you maybe just talk about.

What is assumed in terms of loan and deposit betas and then if you look out over the remainder of the rising rate cycle, where do you see the margin in betas going into 5% fed funds scenario, just given your balance sheet positioning. Thanks.

Yes. So if you think about debate is that we've experienced to date. So I look at high yield savings roughly around 70% when you think about.

Youre 12 months CD rate when you look at that relative to a swap it's between 75% to 80% I would expect Ryan to see that tick up a little bit.

Say high yield savings around 80% and you may see 12 months Cds go to around one again I think a lot of this is going to depend upon the competition in the market with funding needs people have we need to remain competitive with both our digital partners as well as money market funds with regard to that so.

We continue to be encouraged by the strong franchise, we've been able to grow deposits. After a couple of years of actually shrinking deposits to manage the margins. So we're encouraged with the franchise and what we're building there and I think we've been opportunistic with regard to when we access the wholesale market and how we.

We really operate inside both the CD in high yield savings, we swung to a liability sensitive were a little bit more this quarter, not not materially, but a little bit more but I think locking in certificate of deposits.

For 12 months to 60 months is going to set us up nicely for <unk>.

2023, again, we'll be back in January when we see where we exit out of 2022 from a fed funds perspective, and with the fed anticipates a terminal rate will be back to provide some color on how to think about that in next year.

Thanks for the color.

Thank you Frank.

We have our next question from Moshe Orenbuch with credit Suisse.

Great. Thanks, Brian , hoping you could kind of talk about as you think about that credit normalization.

One of the features of your P&L.

Somewhat unique as the as the RSA and how that reflects and we've had some kind of.

That puts and takes over the last several years and good performance this quarter, but could you talk a little bit about how.

As that normalizes, how you would expect at RSA to behave over the course of 2023.

Thanks Moshe.

Again, I think as we've said and I know people have been frustrated with the RSA is acting as the design. So when charge offs kind of trough out the RSA peak now we start to see charge off dollars rising.

Partially offset by higher interest and fees, but really seeing that flow through the RSA, which gave us a sub 5% RSA for.

This quarter, most certainly we've incorporated that into the guide into the fourth quarter again, I think we'll be back in January to kind of give you that trajectory. There is nothing that we look at Moshe that says as you move back towards that normalized loss rate of five and a half that we're going to be outside of the traditional RSA range of four to four five.

So from a charge off perspective, it's acting as designed and should go back clearly I think we're going to have to look at how our net interest margin program performance works, but again, we think generally youre going to see the RSA rate trend down as charge offs trend up.

The only thing I would add there is you also have to remember that also means that payment rates kind of moderate and you'll have some top line benefit as well.

Interest and fees.

Perfect. Thanks, and just as a follow up I mean, you did highlight both the percentage of the business and the growth rates.

You are co brands.

Dual card portfolios maybe.

Could you talk a little bit about whether how the plan over the next several years is the plan to grow that does that does that grow faster and how do you think of FX, that's contributor to synchrony as overall growth rate.

Yes look I'll start and ask Brian to comment I think look we try and grow all of our products.

As disciplined as we can and achieving risk adjusted returns. So I think we've seen really good growth on dual and co branded cards. Some of Thats New program launches. Some of that is new value props that we've launched and refreshed in the last year or two.

We really like that product, it's a great product to graduate customers into over time. So if we start on a private label card with a with a relatively modest line once we get comfortable.

With their credit worthiness and payment behavior et cetera, and we get to know them.

And we get a sense for whether or not they are willing to spend outside of the brand. Then we obviously look at them and upgrade them into a dual card. So that's the strategy. We've had for years. It works really well both from a risk.

Our risk standpoint, as well as a return standpoint, I don't know, Brian if you want them.

Yes, the only thing I would highlight Brian you talked quite a bit about the multi product.

Roche here and having the right product for our customers and when you look at our partner bases, whether it's Paypal Venmo Verizon Walgreens.

And some of that our core retailers T. Jack Sam's that product is fits nicely into the portfolio and we do it at a line structure.

Very different than our competitors, so allows us to control the risk.

In the portfolio and really optimize the.

The balance and frankly some of our best most engaged customers are customers, who earn rewards outside of the brand bring those points back into the brand and our partners really they really value that those are long term very valued customers.

Thanks very much.

Yes.

Hugh.

We have our next question from Sanjay Zuk, Ronnie with K B W.

Actually Vanessa I think from Mihir Bhatia from Bmo's teed up.

Please proceed from here.

Hi, Good morning, and thank you for taking my question.

I wanted to ask just about the underwriting standards in general have you tightened I mean I'm just looking at you know driving the lower.

New accounts.

This quarter Im just trying to understand what could be driving that.

Yes, So let me go to latter part the lower new accounts is really the portfolio sold during the second quarter. If you look at on a core basis, which strips out those portfolios were up 2% and generated again $5 8 million new accounts from an underwriting standpoint, we have not seen in the portfolio.

Attribute which would require us to take kind of measures across the entire portfolio that said here, we always are making refinements and changes to our underwriting standards. We look at channel partners and performance. So so again, we don't see attributes where we need to take a broad based actions.

But we arent.

It's really taking.

Sure.

Taking some small refinements I also want to go back to what's really unique about our underwriting and what we've done over the last.

Several years as we have not relied upon credit to be the primary driver of growth. So we haven't changed our underwriting standards, we haven't gone out like a lot of other issuers to use that and credit lines in order to get new accounts, we have people coming to us because they are the most loyal customers, where our partners and really want to engage with value propositions in the brand.

And because we get so much data from our partners because we are using unique attributes, which we highlighted in prism and our Investor Day, and then you combine that.

You combine those attributes and enrolling together, we think we're making actually hopefully smarter decisions on risk at the end of the day and not having to take more risk and again, we see nothing that today.

<unk> says, we need to tighten across the board, but again, we have the abilities and the tools to manage that risk appropriately. If we see a change in the portfolio. We try to we try to minimize the ups and downs for our partners as well so to Brian's point win.

When times are really good we don't dig a lot deeper and take advantage of that and then put ourselves in a position where we have to pull way back coming out of that I think that consistency and that discipline is important not just for our own risk and returns, but obviously for our partners too so they're not feeling.

Sealing the ups and downs, so we try to stay as consistent.

As Paul today, and just one final point of them here.

Adding on to Brian .

If you go back we've provided a chart before if you look at the volatility in credit through cycles, where just generally less volatile because of the way in which our line structures are in this underwriting standards.

And most certainly can go back we show on the chart a number of different times and it's because of the severity.

And the consistency kind of gives us a competitive advantage.

Got it.

And then maybe just.

Kind of following along with what you said, Brian about being.

For our partners.

How does that conversation started changing now and particularly at what I guess, what I'm asking is around competitive intensity for neocart.

And are there particular opportunities, maybe even with existing partners to grow products just given the pullback in some of the valuations and particularly on the Fintech side are you seeing some welcome those coming back to you, saying Hey, maybe you can add this product just like just trying to understand how those conversations are going and if there's any opportunities.

The competitive environment right now for five months. Thanks, Yeah sure. So look I would start by saying, it's still a pretty competitive environment out there I think given what has happened in some of the fintech space, you've seen a little bit of a pull back there may be a little bit less aggressive in terms of offers and rates et cetera.

But what I will tell you is that as well.

Out talking to our partners and prospects.

What's really resonating right now is the multi product strategy being able to offer buy now pay later paying for migrating to other products in our portfolio because I think one of the things that.

Our partners have seen.

Is that depending on the consumer depending on the product that's being purchased and frankly, depending on the macroeconomic environment are paying for it gets a lot more expensive.

In an environment, where rates are rising at the pace that they are rising and so I think partners have taken a step back and now they're trying to rationalize their point of sale and saying Hey look how do I, how do I optimize us.

For the economy.

Operating in for my consumer for what Theyre buying and what's great is we can go in and say look for this product. We think it's a 12 month six month <unk>.

Promotional financing product with an opportunity to upgrade them into a revolving product down the road.

That's pretty powerful that's pretty powerful because it gives them optionality and it helps them manage the expense side of the equation too in terms of what those financing offers costs down from what it takes out of their margins. So we're seeing really good traction.

So the discussions that we're having out there both with our existing partners as well as new prospects.

Okay. Thank you.

Yeah. Thanks Pierre.

Thank you. Our next question is from Sanjay <unk> with K B W.

Thanks, Good morning.

I guess first question for Brian Wenzel on your comments related to <unk> liabilities.

Understandably it might have some headwinds on the NIM, but I'm just trying to think about NII. Your yield is obviously benefiting from rates, but also higher revolve can you just help us parse through that and you think about it going forward.

Sure. Good morning, Sanjay So when you think about NIM, if I think about it sequentially for the quarter.

We picked up about 30 basis points of price benefit.

And the yields we also picked up about four benefits relating to merchant discount. So when you look at.

The prime impact of 30 merchant discount of four.

Some of the investment portfolios on the cash position picking up 16, we've largely offset.

The interest expense increase so generally neutral the important part, though Sanjay is when I look at the prime rate benefit the effect of prime for the quarter was $4 75, we we tend to be a little bit slower the way our cards bill out and change Apr's. So we have some more room to increase that.

As we move into the fourth quarter. When you think about the merchant discount pricing, we're about 60% to 70% of that price through.

To our partners and that's something that we try to be measured on and deal with competition. So we think that from a margin perspective, most certainly I think in the guide in the fourth quarter, we should get those those tailwind kind of coming through again some of the portfolio will be resetting as you get a full quarter price for some of the some of the CD.

And things like that that we put on in the in the third quarter as well as the increase in the high yield savings, but we feel good about it again I think locking up at these rates. If you believe that the interest rate cycle is going to continue to move up here in the latter part of the fourth quarter into next year.

Those are typically deposits and being a little bit liability sensitive right now.

Benefit us next year as we move forward again, we'll be back in January with probably some more comprehensive thoughts on a sanjay, but that's kind of how to think about it. So so we've got a small lift when I go back to.

The revolve rate and late fees going up with delinquencies, partially offset by reversals, but but again the prime rate is flowing through.

Got it.

And then maybe a question for Brian doubles, just following up on what me here was asking earlier I mean I kind of asked this question last quarter, but you.

You have another quarter of a dislocation amongst fintech valuations you've had the CFPB, obviously come in with some comments on regulatory actions potentially for buy now pay later I'm just curious.

That's presenting an opportunity for you guys do you feel like there might be some offensive moves you can make I mean, just broadly speaking maybe you could just address that a little bit more.

Yes, sure Sanjay look I think we're absolutely playing offense I do think there has been a little bit of a checkup in the market now partners are thinking about these products.

And how they want to design their point of sale for the future and this is where again, we think the multi product strategy wins over the long term.

And I'll comment quickly on just the regulatory environment. We think also favors us I mean, we are heavily regulated today as you know.

And we would certainly advocate for a level playing field that doesn't exist today, so I think to the extent that some of these.

<unk> around the periphery become more regulated and more scrutinized and I think thats a net positive for us.

And so I think there are some a few things that.

Kind of play to our advantage.

For the first time in a few years with valuations where they are maybe that presents some.

Some attractive M&A opportunities. If there is something on the technology side that would be faster to buy than to build so that's something that we're always looking at we've got a very active M&A screen.

I think we're also very disciplined very focused on valuations.

And that was one of the things that we didn't see over the last couple of years was attractive entry points.

But again, that's something that we run a very active process on and we'll continue to look at but very discipline around valuation.

<unk>.

Impact to EPS.

Thank you.

Thanks Sanjay.

Our next question is from John Hecht with Jefferies.

Morning, guys and thanks for taking my questions. Brian you did get into this you were talking to feel you guys gave us good information about the different platforms and you talked a little bit about that.

Customers different use of the products, but I'm wondering I mean.

Where we are in the cycle given that we're kind of moving through an inflationary environment that I think it's kind of need all of us.

Is there any kind of behavioral aspects of the customers that are changing that you think changes the value proposition taking about the different uses like dual purpose versus co brand versus the NPL.

Seeing shifts in that and does that give you any indications for what to kind of look.

Look out for in the intermediate term.

Yes, let me start and then Brian May add some commentary John when we look at the consumer spending behavior patterns.

We're not seeing very much change right there being very consistent they are making choices.

<unk>, where people are saying, okay, maybe I was spending a little bit more for groceries gasoline and we're spending a little bit less on TV, but we're seeing very much consistency as we think about average transaction values and frequency consistently throughout the year and we look at it by credit grade by platform, we look at the World composition.

Ponant, so everything seems to be consistent so the customer itself is not migrating or changing their spending behavior patterns. We continue to see just tremendous.

Positive growth relative to our millennial and Gen Z as they make up about 25% of our sales there are fastest growing cohort.

So call it 4% to 500 basis points higher than the company average so they continue to to view that again the value propositions have to resonate with the customers and we continue to think that in a multi product and distribution model that we have we just think is attractive. So we have not seen the consumer from a spending behavior pattern change significantly again.

Making smarter decisions, but overall level of spend not really changing I think.

We're starting to see on the merchant side I think Brian cover the consumer really well on the merchant side. I think you will see we have started to see and we'll continue to see some adjustment in terms of what financing offers are are presented to the customer because they are trying to manage in a higher interest rate environment and there are costs I mentioned that particularly if you get to some of the really short.

Our data and stuff is.

That gets pretty expensive this year zero percent of the consumer and the merchants paying for all of that so we have seen some.

Some partners.

Working to rationalize the product offerings inside of there inside of their businesses.

Okay. That's very helpful. And then second unrelated question is just thinking about the RSA next year as Bryan maybe you can remind us.

Is the correlation for the.

As credit normalizes correlation for the IRS stated delinquencies provisions or charge offs is there any seasonality or timing differences for us to think about there.

Yes, John we will be back in January 2023, as a whole, but I think if you think about the RSA charge offs move immediately through the RSA line right. So youre going to see that impact as that normalizes into.

2023 that will provide a benefit to the RSA. The other two components I think to think about is reserved postings growth or otherwise flow through the RSA and a little bit of a lag.

So that will that will impact it but again, Brian Brian consistently points out rightfully so that as credit normalizes, we would expect to see you.

Your revenue increase in the yield increase on the portfolio. So so again, if we don't see the payment rate change youre not going to have that normalization may have to they have to work in concert so.

Again, I think those are the general gives and takes I think the other thing will be.

How.

Our cost of funds really moves and that flows through as a benefit to the RSA in a rising rate environment.

Okay. Thank you guys very much.

Thanks, John and good day, Thanks, Sean.

Our next question comes from Kevin Barker with Piper Sandler.

Thank you.

Growth has been extremely strong for you guys, but also across the industry.

Rates have slowed and savings rates have come down.

Yes.

Given what you see out there from a macro perspective.

And these declining savings rates or would you expect this growth to slow considerably as we move through the next few quarters.

Probably get more down to a more normal rate maybe in the mid single digits as we get through near the end of 2023.

It seems like these growth rates are obviously arent.

Yes.

Able to be sustained for an extended period of time. Thanks.

Yes.

The way I think about it Kevin is as you have this period of time, where the consumer is working through.

Number one excess liquidity that they have so that savings rate and that will carry you through particularly on some of the higher spenders.

Into 2023.

In some of the lower credit quality cohorts in hourly people youre seeing wage gains that are offsetting inflation. So you'd have some tailwind with regard to spend and you see that strong spending behavior pattern.

What we probably anticipate is some of that savings drives up as some of them maybe the lack of.

Or the utilization of lower discretionary spending because people aren't going to the office everyday as that tightened a little bit what youre going to see us probably.

Spending come down and payment rate come down, but I think what you're going to see first as payment rate begin to slow spending say there youre going to see balances go up and then youre going to see purchase volume slow. So I think the there could be elongation of asset growth year.

In the short term.

Again, we'll have to see how the economy. The macroeconomic scenario plays out for our medium term, but clearly they are probably more tailwind and headwinds.

In the short term.

Okay, and then you addressed it earlier on some addressed.

Addressed underwriting standards no changes there trying to maintain consistency.

Yes.

<unk> targeted.

$2 4 billion I believe buyback program.

What type of macro conditions or underlying spending trends do you would you see have to see play out before you would start to reconsider whether it's underwriting standards or continuing to buy back stock at the level that you are buying it back.

Well I'll start and ask Brian to comment look I think we are running the business very nimbly right now we're ingesting thousands of data points every day on what the consumer's doing payment trends and behaviors. We look at it by program by product by geography.

We're looking for.

Any indicators that say, we need to make some tweaks as we go and I call them tweaks because for US. This is not an event, it's not one day your risk on and they are de risk off.

You kind of take what you are seeing everyday and you kind of make changes and slight modifications as you go in.

And we feel really good about our ability to do that we've invested a lot in our technology platform. Our data sources are tools.

And so there isn't one thing that we look at but as we're looking at percent of customers that make the min payment how much above the men payment or are they making.

Who's got late for the first time those are all little tells and little signs that say, okay. Maybe we go in and we just we turned the dial a little bit.

And so again, we feel really good about our ability to do that we're not seeing anything right now that is concerning its been a very gradual I'd call. It normalization.

As we move through the year in fact, I think every quarter, we updated our credit guidance and it was it was always modestly better than what we thought 90 days prior so.

We are still in a pretty good operating environment. We don't see anything that says we got to go in and really ratchet down crowding and certainly nothing that says we got to do.

Do anything different than what we're doing on the share repurchase side.

Brian covered credit let me just talk a little bit about capital I think when we look at our business model, we have tremendous I think resiliency in the margin in our capital generation capacity. So I think as we look out.

We look at what's our ability to generate cash.

Capital, we look at the growth in the <unk> as we look at preserving the dividend.

And then we run our stress test and again as we continue to run those quarterly we don't see anything even in some of the most severe scenarios that would would have us alter or slow down the repurchase activities and capital plans, we have in place, but we do that every quarter, we'll continue to do it and as long as we can continue to generate.

<unk> strong returns, we feel good about our capital position and moving towards our target, but but ultimately we're going to have to fully develop the capital stack to achieve the target and thats a little bit relying upon the capital markets, but we feel good there and again I think when you put the story together, we really do feel good about.

The margin of the business when you think about the yield and the losses and then capital generation capacity.

Okay.

Yes.

Thanks, Kevin.

The next question is from Rick Shane with J P. Morgan.

Good morning, guys. Thanks for taking my question.

I wanted to talk a little bit about the allowance coverage.

Given where we are both in terms of growth.

You guys are are indicating that credit will continue to normalize we saw an uptick in delinquencies economic outlook is changing.

Why.

Do we see the allowance coverage drift down a little bit and should we expect that to start heading higher as we move into 2023.

Yeah. Thanks, Rick So so when you look at you look at how we have built our reserve models right. So you look at our baseline macroeconomic forecasts, which again, we take for Moody's as a starting point.

And which shows a call it an unemployment rate next year of 4%.

When we think about credit normalization, right and getting back to that five 5% as we look at the underwriting cohorts. We put on over the last couple of years that migration back to five 5% the implied unemployment rate and the model is higher than that so think about something thats, probably closer to the mid fours effectively.

Don't necessarily put that in but.

Secondly, it shows a higher unemployment rate.

We then overlay basis. Okay. If there is some concern what does that scenario look like so effectively it gives us a higher reserve coverage as we sit here today than than what you would normally.

Expect given the delinquency profile if you just looked at it by its own. So so unless there is a significant deterioration beyond that and we don't see that then you're really going to be in growth driven reserves. If we just looked at delinquencies today and ran our quantitative models it will be below day one seasonal.

So we think we're adequately reserved today to encompass what we think's going to happen.

In 2023, and moving out so we feel good about it I think when you look at the delinquencies that we have in here for three Q. It gives you a pretty good line of sight into what to expect both fourth quarter and most likely first quarter. So you can plan that out and again absent something significant change in the macro environment, we feel pretty good about where the coverage is and then were adequate.

We reserve for under under various scenarios.

Yes, it's interesting I think we're all struggling with the same thing which is that we have a concern going forward, but empirically when we look at the data today, it's hard to.

Sort of connect the dots and.

In terms of that deterioration so we run into the same issues.

Yes.

You have to look at it if I just ran the pure quantitative model I'll just go back to this point again, you'll be below day, one seasonal and it's really the qualitative miles in those overlays that is pushing you higher than day, one and in theory, allowing it. So if you looked inside our quarter. Our quantitative models moved up in our qualitative has moved down as it kind of got.

Embedded into the core delinquency formation. So so again I know, we don't provide a lot of visibility and people don't provide visibility into all of those different models, but they are working in concert with each other and that's that's where we get comfort that we're appropriately provisioned at the end of the quarter.

Great Brian Thank you very much.

Thank you have a good day.

Thank you we have time for one more question. Our final question comes from Betsy <unk> with Morgan Stanley .

Hi, good morning.

Good morning Betsy.

Okay.

Two questions one I know, we talked quite a bit about the net interest margin already.

It's down a bit from the peak that you had earlier this year and the exit run rate looks like.

115.

2728 somewhere in that range for fourth quarter.

And I'm hearing you talk about the migration.

Funding mix looking to go from savings to Cds.

Yes.

And I noticed your CD offer.

Pretty robust.

Robust here.

<unk> months got it at $3 91.

Are you suggesting that.

That gets to four.

At $6 4748, depending on which day you look at it.

That.

You lock that in on the yield side.

And.

At that time.

Through in your funding cost.

It's higher but it's capped relative to what the OSA would do.

Do you feel like the trajectory here should be.

NIM.

This path.

A decline as we move through the year next year or do you think that your shift to Cds, Ken Ken Hope that slide.

Yes, again, we'll be back in January to give you a lot better guidance and visibility into them the way I would think about it.

The pieces that you have moving inside of NIM again from the yield side Youre going to have this slowing payment to give you better revolve.

In the short term higher late fees, partially offset by some reversals youre going to see this continued effect of prime move in we build almost on a 45 day lag to when prime changes, so youre going to see that effect of prime move move through the portfolio. We have the ability to adjust merchant pricing. So those are the I call. It <unk>.

Wins to NIM.

I do think locking in certificates of deposits at this rate. If you do believe that the feds you're going to continue to rise into 2023.

Give you a little bit of pressure in the in the current quarter or two is going to be better as you move throughout the.

And the following years. So it's that shift again, a lot of this is going to depend upon what money market funds do and what other institutions do we clearly see.

Some customers migrating for yield.

But we're gonna main competitive the positive news for US we also see money flowing out of.

Big money center banks, and our panel offer deposits, which gives us an attractive source and again. So we're we're optimistic that we can manage the funding profile will be back in January to detail a little bit more.

And then just a follow up question on your partner activity in <unk>.

They're looking to do to.

To help them with their sales growth as you go into next year, which expect it to be a little bit of a slower paced environment.

Can you give us any sense as to.

The credit box changes that would count as a result of that or.

Other ways that you can help drive your partners' revenue growth. Thanks.

Yes sure Betsy.

I think Brian said earlier, we really don't try to rely on opening the credit box.

Drive sales.

That typically doesn't end well, so we try and stay very consistent discipline. There what we do work with our partners on is more around the value proposition and the experience for the customer as.

As well as being able to offer multiple products and I think that's really where we're focused we're having really good.

Really good discussions with our partners around how we're going to support them for hopefully a strong holiday.

And that is.

Offers val prop it's experience is offering new products.

That are tailored for their customer I think it's really that entire kind of ecosystem that.

That we work on with our partners to drive sales for them.

Proven model I think we've only enhanced it with the investments we've made over the last couple of years and we're pretty optimistic that we're going to support them and hopefully a strong holiday and into a.

Hopefully strong 2023 thank.

Thank you.

Thanks, Brian .

Good day.

We have no further questions.

That now concludes today's call. Thank you all for joining.

And thank you ladies and gentlemen, this concludes our earnings call. We thank you for your participation you may now disconnect.